An International Monetary Fund (IMF) mission, led by James Morsink, held discussions with the Hungarian authorities during November 4-16, 2009 as part of the fourth review of the country’s Stand-By Arrangement (SBA). The IMF mission worked in close cooperation with a parallel mission from the European Commission, carried out in the context of the European Union (EU) balance of payments assistance. At the conclusion of the visit, Mr. Morsink made the following statement:

“The mission reached a staff-level agreement with the authorities on a package of policies that aims at completing the fourth review under the SBA. We expect to finalize a Letter of Intent that summarizes the agreement, with a view to allowing the IMF Executive Board to consider the completion of the fourth review in December.

“Reflecting the consistent implementation of economic policies and the reduction in global financial strains, the authorities do not intend to draw the amount that would be made available upon completion of this review (SDR 725 million or about €792 million). The availability of Fund resources would help to provide insurance against the impact of any unforeseen deterioration in external financing conditions.

“Since the SBA was approved in November 2008, significant progress has been made in strengthening policies that underpin fiscal sustainability and financial stability. Government spending has been reduced in a durable way, while allowing the fiscal deficit to increase in 2009 to avoid exacerbating the economic contraction. In the financial sector, bank supervision and the remedial action framework have been enhanced. By better anchoring market expectations and creating room for a cautious reduction in the policy interest rate, these measures have allowed Hungary to take full advantage of the ongoing stabilization in global financial conditions.

“The end-September targets on the central government’s primary balance, central government debt, CPI inflation, and net international reserves, as well as the target related to government lending to banks, were all met. The target on submission of legislation to parliament on strengthening the institutional framework for bank supervision was met with only a minor delay.

“Looking ahead, the recovery in the euro area is increasing demand for Hungary’s exports, so quarter-on-quarter real GDP growth is expected to turn positive in the second quarter of next year. For the year as a whole, the pace of economic contraction is projected to slow from 6.7 percent in 2009 to 0.6 percent in 2010. CPI inflation, which is being temporarily boosted by the increases in the VAT rate and excise taxes, is projected to fall to below 3 percent by mid-2010. The current account deficit is narrowing sharply to 0.5 percent of GDP this year.

“Regarding policies, strict expenditure control will be needed to reduce the general government deficit to 3.8 percent of GDP in 2010. Over the medium term, a substantial decline in the fiscal deficit is needed to put government debt as a share of GDP firmly on a declining path. Further strengthening banking supervision and the resolution framework for banks will contribute to the preservation of financial stability.”